Mortgage interest and points can significantly impact your tax bill. Understanding the rules for deductibility is crucial for homeowners looking to maximize their . The Tax Cuts and Jobs Act brought major changes to these deductions, affecting both new and existing mortgages.
Knowing the difference between acquisition and home equity debt is key. While interest on acquisition debt remains deductible within limits, home equity debt interest is now only deductible if used for home improvements. Points paid on mortgages have their own set of rules, often requiring over the loan's life.
Mortgage Interest Deductions
Deductibility Criteria and Qualified Residences
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Mortgage interest deductible for taxpayers itemizing deductions on of Form 1040
Applies to interest paid on mortgages for qualified residences
Primary residence
One additional home used as personal residence
Mortgage must be secured by qualified residence for interest deduction eligibility
Deduction limits based on loan origination date
Loans after December 15, 2017 deduct interest on up to 750,000ofqualifiedresidenceloans(375,000 if married filing separately)
Loans before December 16, 2017 deduct interest on up to 1millionofqualifiedresidenceloans(500,000 if married filing separately)
Home Equity Loan Interest Deductibility
Interest paid on home equity loans or lines of credit deductible only if loan used to buy, build, or substantially improve taxpayer's home securing the loan
Examples of deductible uses
Adding a new room to the house
Renovating the kitchen or bathroom
Installing a new roof or HVAC system
Examples of non-deductible uses
Paying off credit card debt
Financing a vacation
Purchasing a car
Acquisition vs Home Equity Debt
Definitions and Characterization
involves mortgage debt incurred to buy, build, or substantially improve a qualified residence
Home equity indebtedness encompasses any debt secured by qualified residence not classified as acquisition indebtedness
Characterization as acquisition or home equity debt affects interest deductibility and application of deduction limits
Refinancing of acquisition indebtedness retains its character up to the amount of old mortgage principal just before refinancing
Tax Treatment Changes
Pre-Tax Cuts and Jobs Act (TCJA) interest on both debt types generally deductible, subject to certain limits
Post-TCJA only interest on acquisition indebtedness deductible
Home equity indebtedness interest no longer deductible unless funds used for home improvements
Examples of acquisition indebtedness
Mortgage to purchase a new home
Loan to build an addition to existing home
Examples of home equity indebtedness (potentially non-deductible post-TCJA)
Home equity line of credit used for debt consolidation
Second mortgage used to finance a child's education
Points paid on loan to purchase or improve primary home generally fully deductible in year paid if meeting IRS criteria
Points not fully deductible in year paid must be amortized over loan life
Calculate deductible portion of points in given year
Divide total points paid by number of payments over loan life
Deduction for points subject to same limitations as mortgage interest under TCJA
Special Considerations for Different Loan Types
Points paid on refinancing loans generally not fully deductible in year paid
Must be amortized over loan life
If portion of refinanced funds used for home improvements, that portion of points may be deductible in year paid
Examples of point deductibility
$3,000 in points paid on 30-year mortgage for primary home purchase fully deductible in year paid
$2,000 in points paid on refinancing existing mortgage amortized over 180 months (15-year loan term)
Mortgage Interest Limitations
Tax Cuts and Jobs Act (TCJA) Changes
TCJA reduced mortgage debt limit for interest deductibility
From 1millionto750,000 for loans originated after December 15, 2017
$750,000 limit applies to combined amount of loans used to buy, build, or substantially improve taxpayer's main home and second home
Married couples filing separately debt limit $375,000 each for post-TCJA loans
TCJA eliminated deduction for interest on home equity indebtedness unless loan proceeds used to buy, build, or substantially improve taxpayer's home securing loan
Implementation and Future Considerations
TCJA limitations set to expire after 2025, reverting to pre-TCJA rules unless Congress takes further action
Taxpayers must carefully track loan proceed use to determine deductibility under new rules
Increased importance of maintaining accurate records of home improvement expenses to justify interest deductibility on home equity loans
Examples of tracking loan proceed use
Keeping receipts for materials and labor for home renovation projects
Documenting timeline of improvements coinciding with loan disbursements